AT&T pulls $39B T-Mobile bid on regulatory opposition

WASHINGTON - AT&T Inc.’s $39 billion bid to acquire Deutsche Telekom AG’s T-Mobile USA came to an end Monday in a phone call between the companies’ CEOs, according to people familiar with the matter.

AT&T’s Randall Stephenson and Deutsche Telekom’s Rene Obermann ultimately agreed the costs of continuing to fight for the deal unveiled nine months earlier were too high, given the opposition from U.S. regulators, the people said. AT&T’s bid to close the year’s biggest acquisition and become the largest U.S. wireless carrier was over.

“They made an unprecedented move bidding on T-Mobile and appear to have miscalculated the risks and the regulatory opposition,” said Kevin Smithen, an analyst with Macquarie Capital USA Inc.

AT&T failed to convince the Justice Department, which sued to block the transaction in August, that it could remedy the market impact of absorbing T-Mobile, the nation’s No. 4 mobile- phone operator. AT&T would have spent months in litigation to try to win court approval, and the company also faced possible opposition from the Federal Communications Commission.

AT&T rose 0.5 percent to $28.89 at 9:42 a.m. New York time and had lost 2.2 percent this year before today. Deutsche Telekom shares fell as much as 2.2 percent and were down 0.2 percent at 8.88 euros.

AT&T, the second-largest U.S. wireless operator, will take a pretax charge of $4 billion to reflect cash payments and other considerations due to Deutsche Telekom, the Dallas-based company said in a statement Monday.

Last Best Offer

The move comes a week after the judge in the Justice Department lawsuit agreed on Dec. 12 to put the case on hold as the telephone company decided whether or how to revise the transaction. The delay may have made it more difficult for AT&T to close the deal by the Sept. 20 deadline.

AT&T had been trying to get regulatory approval for the deal by selling off T-Mobile assets and creating a stronger wireless competitor. The last proposal before the deal was killed was the transfer of $8 billion to $9 billion worth of T-Mobile assets to Leap Wireless International Inc. for a cost of about $2 billion, said two people familiar with the talks.

The Justice Department didn’t consider Leap a strong alternative because the San Diego-based company didn’t have enough money to make substantial capital investments in its network if it acquired the assets, the people said.

AT&T’s Stephenson said in the statement Monday that efforts by the DOJ and FCC to block the deal may hurt customers and industry investment.

Stephenson’s Confidence

“To meet the needs of our customers, we will continue to invest,” Stephenson said, adding that regulators need to allow more airwave sales and reform rules to “meet our nation’s longer-term spectrum needs.”

Stephenson said in March, when the deal was announced, that he was confident of receiving regulatory clearance. He said the combination would help improve service, speed up investment in faster networks and drive wireless expansion in rural areas. The deal would have added T-Mobile’s 33.7 million customers to AT&T’s 100.7 million subscribers, surpassing Verizon Wireless’s 107.7 million.

Critics of the deal said it would eliminate an aggressive price competitor, driving up subscription costs. T-Mobile’s monthly wireless plans are $15 to $50 cheaper than comparable AT&T plans, according to an analysis by Consumer Reports.

“I’m relieved that we are no longer at risk of concentrating such enormous power in the hands of AT&T and Verizon,” U.S. Senator Al Franken said in a statement.

‘Paying the Price’

What Stephenson thought was an opportunity turned out to be an insurmountable challenge, said Charles Golvin, an analyst with Forrester Research Inc.

“I think he overreached,” said Golvin. “They overestimated their ability to influence the regulatory agencies and influence that process. Now they are paying the price.”

The failed deal may cost AT&T next year, said Smithen. The company may have to lower its profit forecast due to capital spending or acquisitions as it makes up for the capacity it had planned to add through T-Mobile, he said.

“The next shoe to drop could be 2012 guidance,” said Smithen. “The company will report earnings next month and we are concerned that there will be downside revisions to 2012 earnings and estimates,” said Smithen.

Ashley Zandy, a spokeswoman for AT&T, declined to comment on the financial forecast.

DT’s Plans

For Deutsche Telekom, the collapse of the deal leaves it with one more subscriber-losing business as the Bonn-based company confronts the fallout from Europe’s debt crisis. Deutsche Telekom had planned to use the proceeds to cut debt by 13 billion euros ($17 billion) and repurchase 5 billion euros of its shares. The company also needs funds to upgrade fiber and wireless networks in Germany and other European markets.

Deutsche Telekom says the deal’s demise won’t change its financial targets for 2011 and that it will remain within its forecast range for debt reduction. The company also said it expects to receive the breakup fee’s cash component by the end of this year, adding that it will resume reporting T-Mobile USA’s earnings as “continued operations.” The division had been reported as “discontinued operations” since the first quarter.

AT&T and Deutsche Telekom pulled their applications to the FCC on Nov. 24, with AT&T announcing the same day that it would record $4 billion in costs this quarter to reflect the risk of the deal collapsing.

$7 Billion Breakup

The withdrawal came after FCC Chairman Julius Genachowski asked the commission on Nov. 22 to send the proposal to an agency judge for a hearing. The same move by the FCC in 2002 helped block EchoStar Communications Corp.’s acquisition of satellite-TV rival DirecTV.

According to the terms of the offer, AT&T must pay Deutsche Telekom a $3 billion breakup fee in cash, transfer radio spectrum to T-Mobile and strike a more favorable network-sharing agreement. Deutsche Telekom has valued the breakup package at as much as $7 billion.

In an effort to sell the deal to regulators and the public, AT&T vowed to honor the T-Mobile service plan prices after the merger. The company also vowed to bring 5,000 call-center jobs currently based overseas to the U.S. in the event of approval.

“They rolled the dice and took their chances,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York. “In the end, it didn’t work out, but that doesn’t mean it was a mistake to try.”

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